Emerging Market Myths

Interesting SeekingAlpha article pointing out credit expansion as an often overlooked factor in developing market growth, and that when credit expansion stops, developing markets may stop developing.

It is almost taken for granted that many emerging markets will continue to experience higher growth rates than more established countries including the United States, the U.K., and most of the countries in Western Europe. However, it is usually assumed to be the result of a superior educational system, a more coherent set of cultural values, high population growth, vast natural resources, and numerous other factors–all of which are almost completely irrelevant to the issue of economic vibrancy. Let’s focus on the single most important feature of emerging markets, which is the availability of credit. Developed markets have enjoyed relatively easy and plentiful access to credit in numerous forms for decades or longer–mortgages, credit cards, auto loans, installment payments, low money down payments, government-guaranteed borrowing, and numerous related institutions. In sharp contrast, much of the rest of the world was on a cash-only basis until just twenty or thirty years ago (or even less, in some ‘frontier’ countries including Colombia, Mongolia, and Uganda). If you live in an all-cash economy which suddenly begins to use credit, there will be an immediate surge in spending–and which will create a domino expansionary effect. When someone borrows money, that money quickly finds its way into the real economy. Over time, as that loan has to be repaid, this will have a gradual drag on the economy over a period of several years or more. However, the immediate impact is invariably positive. In any nation where most of the GDP growth is caused through the expansion of local businesses, as in China and India, the fact that many millions of people will suddenly have access to credit will almost certainly create double-digit increases in annual revenue for many sectors of the economy. This higher rate of growth can only continue as long as credit continues to become more readily available to an ever-increasing segment of the total population. Eventually, as in the developed world, a point of saturation begins to be approached. There are still those who do not have access to credit, but they will eventually consist primarily of those who are not creditworthy due to their limited personal circumstances, or the minority of those who simply refuse to borrow money under any circumstances. Once this saturation point is reached, further credit expansion slows dramatically. This has the immediate effect of causing lower rates of economic growth. In the longer run, the reality of widespread loans having to be repaid will have an even more negative effect on the economy, especially during times of recession when assets become less valuable, while loans are not diminished in magnitude. In relative terms, then, the loan-to-asset ratio of much of the population will dangerously increase.

The author makes a good point, especially scary if you consider many emerging markets drastically (100%!) under report their public debt numbers, but credit expansion isn’t the only reason for growth in Asia. The more important, and more real story is productivity growth.

China has a good educational system, stable government, and talented, hard working citizens. No reason Chinese labor should be priced at 20% of USA labor, especially when Chinese blue collar labor is MORE PRODUCTIVE than US blue collar labor in many situations (environmental regulations, employee obedience).

Real-estate prices in China are already adjusted for 10-20 years from now when those prices hit parity, but still many medium/long businesses opportunities selling to the chinese consumer, particularly: Agriculture, Finance, Retail, Medicine, Health & Fitness.

7 thoughts on “Emerging Market Myths”

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